1 Issue No. 8 MICRO INSURANCE MATTERS
2 GLOBAL MicroEnsure Runner-up in FT Award MicroEnsure has finished runner up in a prestigious international industry award with 155 entrants from 46 countries. MicroEnsure came second in the 2010 Financial Times Sustainable Banking Awards in the category Banking at the Base of the Pyramid. The awards, organised by the Financial Times and International Finance Corporation (IFC) were announced at a ceremony in London on 3rd June attended by more than 250 senior bankers and industry leaders. Low Cost Health Insurance MicroEnsure has been recognised for implementing a successful health insurance scheme in India which serves the low-income market in partnership with a range of microfinance companies, non-profits working in slum areas and religious groups. The health insurance product designed in conjunction with United India Insurance Company and New India Insurance Company costs approximately $10 per year for a family of four people and provides service on a cashless basis. Innovative Cover Solutions MicroEnsure s health product was amongst the first in India to provide cover for maternity and pre-existing illnesses from the first day of the policy and allows premiums to be paid in flexible instalments. Having successfully launched the product in partnership with SHARE Microfin, a leading India microfinance company, MicroEnsure experimented with additional distribution channels including Calcutta Kids, an NGO serving slum dwellers and through hospitals run by the Church of Southern India. MicroEnsure has extended the product to over 200,000 farmers in partnership with Solapur District Co-operative Bank in Maharashtra state. The Role of MicroEnsure Acting as a project leader, MicroEnsure conducted market research to understand clients needs before designing the products. They then located the best insurance company to ensure a high service standard. Microensure provided training to their partners field staff and borrowers using comic books. MicroEnsure then located the best Third Party Administrator (TPA) that could provide a suitable network of hospitals and process claims. MicroEnsure guarantee a level of service and hold partners accountable to provide that service for clients and acts as a first point of contact for all claims issues. OUR BUSINESS MODEL To bring insurance effectively to the poor, we see three tasks that need to be accomplished: The first task is carrying the risk. We believe that existing insurance and reinsurance companies are best placed to do this but in some cases no willing insurance carrier can be found. MicroEnsure is pioneering the use of cell captives which are special underwriting vehicles used to carry health insurance risk in Africa and further afield. The second task is that of the front office the sales platform. We partner with those organisations that have effective outreach to the poor such as MFIs, NGOs, and retailers. The third task is the back office keeping track of the insureds details, premiums, and claims. For this we have developed a very sophisticated MIS system. This is the key to keeping costs at a minimum. The back office also provides product development for the risk carrier, training for the front office, as well as financial education for the clients. MicroEnsure derives revenue from two sources. The first is commission income when we work as an insurance intermediary in partnership with an insurance company and a front office partner such as a microfinance organisation. The second revenue source is generated by insurance companies outsourcing their existing back office operations to MicroEnsure. Insurance Company Reinsurance Company Cell Captive Risk Carrier Front Office Microfinance lender NGOs/Faith-based Retailers Avon model Back Office Product design/ negotiation Training/client education Data capture/reporting Claims servicing
3 INDIA Dipu Soni s Story Dipu Soni (pictured bottom left) is nine years old and lives in the village of Vijayraghavgarh, Madhya Pradesh. In April 2009 he was flying his kite when he fell from the roof of his house. Dipu was knocked unconscious by the fall and his bleeding remained untreated for some time. His parents sought the help of Share Microfin Ltd. (SML) to which the family had been contributing an annual health insurance premium of INR 479 (approximately USD11). The local SML employee, Mr. Manoj Chourasia contacted Pavan Kumar, Client Relationship Officer at MicroEnsure. The next day, Dipu was admitted to the networked medical centre, Mohanlal Gupta Memorial Hospital in the nearby town of Katni. He was placed in intensive care and remained in the hospital for a further five days until being discharged on the first of May. The cost of Dipu s medical expenses totalled INR 9200 (approximately USD 201) and were paid for by the health insurance scheme that his family had joined. Without insurance, Dipu s family would have been forced to take out a loan with a monthly interest rate of around 3%. If repaid within a year, the repayments could have cost as much as INR 30 (approximately USD 0.66) per day. As labourers, Dipu s parents earn below the poverty line, estimated by the World Bank at INR 14.3 (approximately USD 0.31) per day in rural India. Because Dipu s family were covered by an insurance scheme it meant that the financial cost to them was only INR 1.3 (approximately USD 0.03) per day. Without microinsurance Dipu s story would have been very different. JOBS MicroEnsure are looking for Principal Officers to join growing and dynamic teams in Kenya and Tanzania. We are currently recruiting for an IT Manager / Team Leader to lead our IT operations team. This is an exciting opportunity for an individual with experience of global IT operations and implementing/supporting enterprise-class solutions. For more information please visit
4 INDUSTRY OPINION: Distribution is King There is no demand for insurance. Insurance is sold not bought. Distribution is king. These maxims describe the nature of the retail insurance business worldwide; whether in fully mature markets such as Europe, United States and Japan, or emerging markets such as Russia, Uganda, India or Guatemala. No Demand. No one wakes up in the morning and says, I need to buy insurance. As opposed to the latest iphone/htc Legend, ipad/kindle or cereal, people don t respond to a television, print, radio or billboard ad by going immediately to a retail outlet and pulling the latest insurance product off the shelf. Consequently, insurers invest little money on advertising as response and/or topof-mind rates do not generate profitable returns. Experienced insurance professionals attribute the general disinterest to overall aversions to the tragic or difficult that may or may not come to pass. People generally do not think, or want to think, that someone in their immediate family could suffer a death or illness. In many Asian cultures, the topic of death is taboo and thus insurance companies talking points emphasise education for children. Likewise, people do not want to think that something sporadic and outside their control such as an earthquake, hurricane or fire could wipe-out their livelihood. The difficult nature of quantifying the actual value of assets and the cost for their protection from something with low probability magnifies these aversions and uncertainties. Certainly, exceptions to this maxim do exist. Mandatory automobile insurance has prompted very strong direct-to-consumer operations whereby television, billboard or print ads invite clients to contact the insurance company via the telephone for a quote on this commoditised insurance product. Aflac s quacking duck sells supplemental, work-based insurance through television and print advertising. And event marketing such as raffles and golf tournaments put insurance brands in front of specific consumers. However, each of these exceptions comes with the caveat that insurers still must sell the insurance to the client. A telemarketer still must sell car insurance to the client who calls in response to an advertisement. The employer usually must establish and serve as the distributor for Aflac s coverage, and event marketing usually targets distributors of insurance such as brokers or large companies. Consequently, for those of us who have built profitable, sustainable insurance businesses in a variety of markets, the intense discussion of the demand in the microinsurance sphere seems to miss the nature of the business. We scratch our heads as donor or taxpayer monies pay for studies to assess market demand when worldwide practices of insurance suggest those hard-won dollars could be used more effectively in developing important facets of the industry. Yes, awareness of insurance grows as markets develop, but the drive is not demand but selling, and thus distribution. Sold, not bought. Insurance is sold, not bought; it represents the classic and perhaps extreme example of a push market. The sales process starts by insurance companies or intermediaries identifying risks or needs of people or companies. Once clearly identified, they construct products to cover those needs by looking at worldwide or local practices and running them through various profit testing scenarios to identify those with the most potential for profit and growth. Then they test product variations through focus groups that allow them to tailor products to sell profitably to the targeted population. Thereafter, companies determine how to sell the product; often testing several sales arguments and distribution methods. The company or broker often can bypass the focus group stage with enough experience from elsewhere and go directly to the distribution testing phase. Once the company has found the most cost effective and expansive sales argument and distribution method they roll-out the product, making necessary adjustments along the way. Obviously, if the focus groups flop entirely or the testing phase of distribution proves ineffective, the insurance company either modifies the product and sales process or discontinues the endeavour entirely. For microinsurance, a look at product development for the mid to low income segments in mature and emerging markets can prove extremely valuable. Companies have followed the above process to move down-market by developing and selling low-cost, simply underwritten products such accident, health and life through a variety of distribution methods. Consequently, for many years insurers in Spain and many other markets have sold simple products in an informative and ethical manner over the telephone or over-the-counter (OTC) in a matter of minutes to people with relatively little knowledge or understanding of insurance. The product arrays on the current microinsurance landscape suggest this emerging industry has taken findings from more developed markets and applied them, including the pioneering A&H credit life product in Africa. Distribution is King. Without distribution insurance companies cannot sell their products and thus cannot exist. Distribution involves two key components: 1) relatively easy and efficient access to clients and 2) a simple payment mechanism to transfer premium from the client to the insurance company. If you build it, they (insurance companies) will come. Insurance markets vary in their development due to insurers ability to build profitable distribution channels. Over the years, distribution in developed and emerging markets has evolved as companies have sought more efficient methods to sell their products. These distribution methods include tied-agency networks visiting families and companies to provide products from one company; independent and/or large networks of brokers providing multiple lines from various companies for individuals and companies; bank distribution providing mainly life insurance products to their customers, and; finally, direct to consumer operations selling marketing of simple life, accident, health and property products via telephone and mail to customer databases or lists.
5 Microfinance institutions (MFIs) have proven to be kings of microinsurance precisely because these institutions have direct access to clients and an easy way to pay for the insurance. Often through an obligatory group cover, the borrower must take the insurance along with the loan in an efficient process that packages the loan with the insurance. Ideally, MFI (or any other lending institution) sales staff explain and illustrate the insurance cover, its cost and the claims process during the sale of the loan. The client then either pays for the insurance via financing on top of his/her loan or through a deduction from the loan disbursed. The MFI then passes the premium to the insurer through a clear invoicing process. The fact that credit-life product offerings often include nontraditional term-life (funeral) riders for clients and family members and catastrophic riders (credit-life+), and that the cost of this insurance can come up to a 50% discount over traditional credit life cover in more mature markets underlines the distributional strength of MFIs in their respective markets. On the other hand, and from a business point of view, microinsurance has much to offer MFIs. First, credit-life+ allows MFIs to manage the risk of default due to death in the family. Often MFI clients operate small, family-owned shops and the death of the client, spouse and/or children can have a severe effect on the client s ability to repay the loan as productivity and revenues can fall. Lending institutions can be tempted to take this default risk upon themselves. However, most regulatory environments mandate that lending institutions move this risk off their books to an insurance company, even if wholly owned by the bank. This underlines the importance of outsourcing the risk to an institution with professional capacity to understand and thus underwrite the risk. Second, credit-life+ allows the client to manage risk in a cost-effective manner that removes liability of them or their family for repaying the loan while providing additional monetary assistance should something tragic occur. A simple illustration: A client taking a $300 loan and getting a credit-life+ cover of the loan balance plus $600 for funeral/other benefits, would pay $3.00 for the insurance benefit at a 1.0% rate on the loan. If a client and/or spouse suffered a loss two months into the loan, they would have the loan balance paid off (simply at $150) and receive $600 for expenses. If the client did not have insurance and had to take an emergency loan for $750 ($600+$150) for four months at 50% EAPR, client s family would pay approximately $125. Should a client establish a savings account to cover a tragic event of equal value, he/she would need to deposit $188 per month over a four month period to cover the $750 value provided by the insurance. Given the tight constraints on the disposable income of MFI clients, $1.50 looks like a very favourable risk management option, especially when the client most likely cannot get this cover in the open market. Third, microinsurance can generate solid net income streams to MFIs. Lending institutions spend large amounts of money building distribution and thus there is high inherent value in this distribution. Product providers such as insurers, money transfer services and others are willing to pay commissions to lending institutions for access to this distribution. Generally, the income initially comes from distributing credit-life insurance. With time, lending institutions get into more direct-to-consumer sales through over the counter or telemarketing via their databases. Worldwide, lending institutions in competitive markets can generate up to 30% of their net income from insurance. If the institution is in start-up mode, the percentage becomes even higher. As free money dries up and MFIs strive to run profitable, sustainable businesses, MFIs ignoring this worldwide market practice do so at their own peril and most likely risk the sustainability of their enterprises. Microinsurance has lagged in its development particularly because insurers have had few options aside from MFIs to distribute to low income households and businesses. The low cost, low ticket products preclude the development of expensive agency and/or brokerage distribution. Likewise and in the past, the lack of technology prohibited more sophisticated direct to consumer methods that many companies use to access the lower income market as in more developed markets. However, microinsurance maybe on the cusp of a more rapid development as ubiquitous mobile phone, money transfer and other services are starting to present excellent opportunities for insurers to reach these populations. Mobile phone companies and money transfer services, have access to enormous number of customers and easy payment mechanisms. The payment mechanism cannot be over-emphasised: again taking a cue from direct marketing, companies lose 50% of potential insurance customers on the phone, once they begin asking for a payment mechanism credit card, bank account. Given these opportunities, the fact that these businesses see value in their distribution - and they are looking to maximise their revenues, just as lending institutions do worldwide microinsurance should have the some excellent opportunities for expansion. Joseph Schaefer Joseph Schaefer runs Schaefer International Financial Services, providing investment, strategic planning and other consulting services to firms looking to invest-in or restructure insurance and other financial services in developed and developing markets. Schaefer has worked with FINCA, the Inter- American Investment Corporation, and a number of investment funds in Africa, Europe Latin America and North America. After working in a number of varied markets over the years, one can see the fundamentals of building and managing an insurance enterprise spread from market to market. In short, markets are more similar than dissimilar, especially if trying to establish a profitable, sustainable insurance business and industry. In the end people do not demand insurance, insurance is sold and distribution is king. The more that microinsurance practitioners recognise these maxims and develop ways to sell and distribute insurance products, the more quickly people and companies will be able to mange their risks and the industry can grow to more than 1% of worldwide premiums.
6 PRODUCT FOCUS Political Risk Cover When MicroEnsure was opening its new insurance brokerage in Kenya it conducted research with the borrowers of a number of microfinance companies. The borrowers expressed concern about the risk of losing their businesses and possessions during the rioting and looting that has recently become a part of Kenyan elections; so our product team designed and negotiated the following product with our local insurance company partners; Credit Life The underlying product is a standard credit life product that covers the value of the loan upon death of the borrower, but it is modified to include: Family Funeral A sum of Ksh 25,000 ($300) is paid upon death of the borrower, spouse or children to help with the cost of a funeral. Disability and Critical Illness If the borrower is unable to pay the loan due to disability of critical illness then the balance is cleared plus Ksh 5,000 ($60) is paid. Fire and Natural Disaster If the micro enterprise is affected by a fire or natural disaster then the loan is cleared. Many markets where our clients work are affected by flooding and market fires Political Violence and Riots The loan is covered in the event that the borrower is affected by political violence or riots. This is the only microinsurance available in Kenya (and possibly elsewhere) that provides this protection. The standard credit life, funeral and disability package costs between 0.7% - 1.2% of the loan depending on the number of borrowers in a group. The protection for fire can be added for an additional 0.25% of the loan and the political violence protection cost Ksh 100 ($1.25) per loan irrespective of the loan value. MicroEnsure is working with a number of microfinance lenders who offer this product to their borrowers. INSIGHT New ways of reaching the poor Like most organisations that provide insurance to the poor, MicroEnsure started working in partnership with microfinance organisations (MFI s). Today we have partnerships with over 60 MFI s in Africa and Asia and between them these MFI s have over 12,000,000 active borrowers. However, our experience is that these MFI s are not the only way to reach the poor; after all only around 150,000,000 families have access to a microfinance loan and there are billions of people living in poverty. MicroEnsure has been working with a number of different types of partners to reach the poor including NGO s such as CARE International and religious groups such as the Anglican Church. When working outside the MFI s to sell voluntary insurance, the partners brand has emerged as being an important factor in the success of the partnership. We started working with the church in India where we sold a voluntary health insurance product to families in Kerala. The Church of Southern India owns and operates highly regarded hospitals that are used by the low income community and together we reached out to the fishing communities to sell a combined in and out patient product. We were impressed that almost 40% of our clients were not members of the church but were actually Muslims or Hindus; people trust faith based groups regardless of whether they share the same faith. In partnership with the Anglican Church, MicroEnsure is planning to start selling health insurance to members of the church in Tanzania later this year. The product which covers malaria, maternity and diarrhoea for in and out patient visits costs $40 for a family of five people and will be pilot tested in Dar es Salaam before being rolled out across Tanzania.
7 TECHNOLOGY: Martin Fuller, Chief Technology Officer A1 Goes Live In my last article for this newsletter in July 2009 I talked about the planned IT solution implementation that was to be an integral part of our use of technology as an enabler to help serve the poor more effectively and efficiently. As I reflect back on an eventful year, I am pleased to say that we are now starting to see the benefits of the deployment of this solution in two countries, India and Kenya, with a third implementation (in the Philippines) planned within the next few months. Low Cost IT Solutions A key part of MicroEnsure s role of serving the poor through providing low cost insurance products is our function as a provider of back office operations. Every day we are dealing with thousands upon thousands of pieces of information relating to our customers, their policies and any claims that they may have submitted. The volumes of data are too great and the required turnaround of processing too short for these to be managed manually, so we require an effective IT solution that ensures that data can be managed and processed both accurately and quickly, but also at a low cost. As an added challenge the system has to be able to be made available to operate in places where the local technology infrastructure may be quite limited, with poor internet connectivity and unreliable power supplies. of weeks of development time depending on the complexity of the product. Rethinking Data Management The new branch utility therefore called for a radical rethink in the way that we manage our data. The biggest change was a shift in the source of truth from uploaded in electronic format, directly from our partner organisations, with the data going through exactly the same business rules validation as for manual data entry. Efficient Data Processing Our existing branch utility was implemented with a view to addressing some of these challenges of enabling effective data processing in areas of sometimes poor technical infrastructure, but unfortunately did so at the expense of flexibility and ease of use of the system. The branch utility had been implemented primarily as a data capture tool within our local offices, with data synchronised on a daily basis to our core processing system held in our Denver data centre where detailed data validation and calculation of premium etc were carried out. Whilst this was good from the point of view of ensuring that our data was robust and secure, it did mean that we were not able to be as responsive to any data errors that may not have been identified by data encoders when transcribing information from paper forms. There were other limitations, including the time taken to set up new insurance products, which could range from a few days to a couple the centralised core processing system to the branch utilities. Data is still synchronised to the central system in our data centre from the local country operations on a daily basis, but all the data validation and calculations are carried out at point of data entry in the countries. A sophisticated business rules engine, driven by a third party application from Idiom Software, drives these validations and calculations, resulting in a flexible and parameterised approach to product development. This means that new insurance products can now be implemented in the space of a few hours, rather than days or weeks as previously. In addition, the fact that data is validated at the point of entry means that any data issues are immediately identified and rectified or noted, rather than staff having to revisit data based on reports from the core system. The new utility also allows for data to be received and Future Development We have further plans for the development of the new utility including integration with mobile payment solutions and a partner portal to enable our partner organisations, such as underwriters and microfinance institutions, to view and update data that is relevant to them, as well as to access comprehensive reports. That is for the future, but the focus now is on deploying the new utility into all of our existing operations so that they can gain the benefits of improved speed to market for products and more effective data management. Good systems are always able to evolve with the needs of a business, but already we are starting to see the benefits of how the right technology can be used to support our ultimate goal of serving the poor more effectively.
8 THE PRESIDENT S COLUMN Are we really helping the poor? If you measure the success of a movement by the amount people talk about it then I think we should all give ourselves a pat on the back, clearly microinsurance has succeeded judging by the weekly microinsurance conferences in every corner of the world! Seriously though, we have come a long way as an industry in a short period of time and we should be proud of the attention that our collective work is drawing from the international development world and the insurance sector. But with that attention comes the hard questions, such as.. does microinsurance really help the poor? To those of us that have worked our whole lives in insurance this kind of question is puzzling, it s like asking if oxygen is a good idea, but they are valid questions and we have to be prepared to answer them. The problem of course, is how to answer them in a way that is rigorous but also realistic. It s good to see some of the industry s brightest minds turning to tackle these questions and MicroEnsure is looking forward to being used in whatever way makes sense. I think all of us could give examples of sitting under a tree and listening to a mother s tale of how she took her sick child to hospital, waited for medicine and a doctor but when none came turning to the private hospital for help but needing to find money upfront to pay the hospital fees. Most of us will admit to being enraged when we heard that the child died as the mother tried to raise the funds by selling assets. But these experiences, whilst valid as personal motivation, will not cut it with those that ask for systematic proof that insurance really benefits the poor; we ve got to get ready with robust answers as an industry and be willing to be realistic about what does work and more importantly what does not work. We can only hope to answer these questions if we seek to work together as an industry. There is no one group that holds the answers. Perhaps it s time for academics, consultants and practitioners to put their differences aside and work together to find robust evidence of how insurance benefits the poor. Perhaps together we have a chance of providing the answers to the hard questions and demonstrating that this industry that we all care deeply about is worth the attention it is receiving. Richard Leftley, President and CEO MICROENSURE GLOBAL OPERATIONS OFFICE: MicroEnsure First Floor Parker Court Knapp Lane Cheltenham GL50 3QJ UK EDITORIAL CONTACT: BANGLADESH MicroEnsure Telephone GHANA MicroEnsure Telephone INDIA Micro Insurance Services Pvt Ltd Telephone KENYA MicroEnsure Telephone MALAWI MicroEnsure Telephone MOZAMBIQUE MicroEnsure Telephone PHILIPPINES MicroEnsure Telephone RWANDA MicroEnsure Telephone TANZANIA MicroEnsure Telephone UK, GLOBAL OPERATIONS OFFICE Telephone USA, HEAD OFFICE Telephone